If you’ve recently got the bug and started trading crypto, earning it through staking, or even bought a few NFTs, and now you’re sitting there as the financial year comes to a close sweating about how to pay your taxes, you are not alone. Record numbers of kiwis are turning to blockchain-based crypto assets with an estimated 324,000 of us now owning at least some cryptocurrency.
If you ask how cryptocurrency taxes work on any of the popular Facebook or Reddit groups you will get a hundred people give you a hundred different answers. Everything from “it’s not taxable” to “you only pay tax on what you cash out to your bank account” and “you pay capital gains tax”, or any combination of other responses and the answers are largely incorrect.
Inland Revenue has released detailed guidance on cryptoassets and how they should be taxed, but it is quite complicated to understand and even more complicated to apply. Combine this with the noisy rabble of online opinions and the fear of looming accountant bills, and it’s no wonder everybody is overwhelmed by it all.
Let’s talk through the guidance in simple terms, bust a few of these myths and show you how to get your crypto taxes under control quickly and easily.
Inland Revenue Cryptoasset Guidance
So far, no new legislation has been created to cater specifically to cryptoassets. The guidance is an interpretation of existing legislation regarding traditional assets that have been applied to cryptocurrencies. In some ways that makes it easier, since things like gold and shares have been traded for a long time and the taxation of these assets is well understood. In other ways, it makes it quite difficult because cryptoassets vary wildly in form and function and their use can change from day to day or person to person.
When you buy and sell any assets, deciding whether or not the activity is taxable comes down to a combination of your intent and your actions.
Since New Zealand has no blanket capital gains tax, when you buy and sell any assets, deciding whether or not the activity is taxable comes down to a combination of your intent and your actions. For example, if you purchase a house primarily to live in, but you sell that house for a profit some years later, the profit is likely not taxable. But if you bought a house that you didn’t live in with the intention of selling it for a profit later, the profit is likely taxable. Or, even if you do live in them, but you’re buying and selling them frequently, you’re probably doing it with the intention of making a profit and the profit is likely taxable. In any case, your intent is important and should be well documented. The default position of the IRD is that all cryptocurrency trading is for the purpose of making a profit and therefore taxable.
What is the tax rate for cryptoassets?
As an individual, any taxable profit from your cryptoasset activity is taxed alongside your other forms of income such as wages.
The rate at which you’re taxed on your cryptocurrency income will vary and depend on what your total overall income rate is based on the current marginal tax rates for individuals.
So for example, if you earn $50,000 per year as your salary and you earn another $10,000 a year trading cryptocurrencies, the cryptocurrency would likely be taxed at 30% since that is the marginal tax rate for income between $48,000 and $70,000.
Great, now we have some clarity of what rate our gains are taxed at, but how do we work out how much profit we have made?
How do we calculate the taxable income?
The main thing to understand is that it’s the “disposal” of a cryptoasset which is a taxable event and the profit or loss is always calculated in New Zealand Dollars at the time of disposal. The disposal can be when you sell a cryptoasset for fiat currencies like New Zealand Dollars, when you sell one cryptoasset for another cryptoasset, when you buy goods or services with your cryptocurrency, or any other time when you exchange your cryptoassets for another form of value.
If you have only ever purchased crypto with New Zealand Dollars and never traded it for another cryptocurrency, sold it for fiat, or used it to earn more crypto, you likely don’t have any crypto earnings to report.
The main thing people forget is that crypto to crypto trading still creates a taxable event. This means for example if you buy Bitcoin (BTC) with New Zealand Dollars (NZD) and then a month later use that BTC to purchase Ethereum (ETH), there is a taxable event created which needs to be accounted for. When you exchange the BTC for ETH, disposal of the BTC happens and you need to calculate the price difference of the BTC in NZD between when you bought it with NZD and disposed of it for ETH.
This can seem counterintuitive because let’s say you bought 0.1 BTC for $5,000 NZD and then you bought 2.5 ETH with the 0.1 BTC, so what has changed? You still have 0.1 BTC worth of ETH right, so there is no profit made yet? Seems like it makes sense, but this is not correct in terms of NZD.
If you buy 0.1 BTC for $5,000 NZD then a month later that 0.1 BTC is worth $7,500 when you exchange it for the 2.5 ETH, you have not bought $5,000 of ETH, you have bought $7,500 of ETH with BTC you paid $5,000 for. Even though they are equivalent in terms of BTC-ETH they are no longer referring to the same NZD amount and you have made a $2,500 profit, nice one!
The disposal of crypto is the taxable event and the profit or loss is calculated in New Zealand Dollars at the time of disposal.
In this example, calculating the profit is reasonably straightforward because we bought and sold the whole trade each time. Where it becomes more complicated is when you buy or sell partial amounts of your inventory and that is where we need to use one of the inventory management systems which Inland Revenue has given the green light.
What are inventory management systems?
When we trade cryptoassets, we often have many purchases and sales of the same cryptocurrency, and inventory management systems standardize the way we match sales with purchases to determine the profit or loss. Inland Revenue currently approves of using First In First Out (FIFO) and Weighted Average Cost (WAC).
First in First Out (FIFO)
This pretty much does what it says on the label, the first cryptoasset of that type which you purchase is the first one that you dispose of. So for example if you make the following purchases and sales;
Using FIFO, the first sell order (3) is matched to the oldest buy order (1) and the profit made across that trade is $3,000. Then the next sell order (4) is matched to the next oldest buy order (2) and $2,000 is made across that trade for a total of $5,000 profit.
This seems straightforward, but it does become extremely complicated quite quickly when buying or selling fractions of orders instead of matching a whole amount neatly each time. This is one place when automating the process of matching orders is going to make figuring out your cryptoasset earnings infinitely easier.
Weighted Average Cost (WAC)
In simple terms, instead of matching particular buy orders to sell orders, you calculate the average cost of all the buy orders which occurred before the sale and use that to determine how much profit or loss the sale generated.
So if we take the same example as before;
Using WAC, the first sell order (3) is matched against the average price of the previous buy orders (1 & 2) which is $11,000 which means the profit is $2,000 on that trade. Then the next sell order (4) is matched against the average price of $11,000 and a $3,000 profit is made across that trade for a total of $5,000 profit.
This method is perhaps even more straightforward than FIFO but it still does become complicated especially when you are buying or selling fractions as the average price effectively needs to be recalculated each time inventory is added or removed.
In either case, the earnings are the same in the long run and any differences will even out over time.
What about Mining, Staking, or DeFi earnings?
Any blockchain-based earnings have a taxable event when the earnings are issued and then again when they are sold. However, this does not amount to double taxing cryptoasset earnings. If you stake 1,000 Tokens which are worth $1 NZD each at the time you earned them, you immediately have $1,000 of income to report. If then a month later the price has gone up to $2 and you decide to sell these tokens, you have made $1,000 profit between when you staked them and when you sold them and you have another $1,000 of income to report, totalling $2,000 of income.
It is the same amount of tax paid if you were to just consider the final sale of $2,000 as taxable income, but these events may occur in different tax years if you hold your tokens for some time before selling them so they are reported separately.
Blockchain-based earnings are considered taxable income at the time they are received, and when sold the difference is what is taxable not the whole amount.
The other important thing to note is that these tokens which are mined enter your FIFO or WAC inventory at the time they are received. So if you have some inventory you purchased through trading and some you mined, it can become quite difficult to make sure you are correctly matching these up with sell orders for FIFO or your WAC is taking them into account at the correct time.
Can I write off cryptoassets that were lost or stolen?
Trading losses, network fees, interest, and exchange fees are deducted from trading profits to calculate your trading earnings. Similarly, you can deduct any cryptoassets which have been lost or stolen, but you can only deduct the price they were purchased at and not the price which they were worth when they were stolen. So if you bought 1 BTC for $10,000 and it was scammed from your wallet when it was worth $100,000 that means you can only deduct the $10,000 and not $100,000 unfortunately.
How am I actually supposed to do this?
In short, you need to collate your trades across all the exchanges you trade on, find the historical values of each crypto you have traded in NZD for the date your trades took place, calculate the profit and loss in NZD using FIFO or WAC, and splice in any mining earnings, fees, and other income or expenses.
It is an extremely difficult and time-consuming process if you have more than about a dozen trades. If you pass it on to your accountant to figure out, they will have to do the same process which will still take them hours and likely cost you thousands of dollars. Thankfully there are some shortcuts!
Taxoshi automates the entire process for you in line with Inland Revenue’s guidance in a matter of minutes.
The first thing to do is to figure out which of your activity is considered taxable and the likely answer to that is “everything” since that is Inland Revenue’s default position. If you think you have income that might not be taxable you need to confirm that directly with a chartered accountant before making any assumptions.
Then you can export your trading history from the exchanges you’ve traded on and upload them to Taxoshi, add your blockchain addresses, and any other income or expenses you want to report. Our platform will automate the entire process for you and generate your earnings report in line with Inland Revenue’s guidance in a matter of minutes for as little as $99 per tax year.
From there, you can take your Taxoshi report and file your IR3 or IR4 tax return form using the earnings figures we provide, or you can send the earnings report to your accountant to integrate with the rest of your income.
Find out more about how Taxoshi works and try our calculation wizard for free at taxoshi.com, or if you’re an accountant, get in touch to hear about our enterprise offering.
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Disclaimer: We are not financial advisors, accountants or lawyers. Any information provided in this article is not intended as investment or financial advice. You should seek professional investment or financial advice before making any decisions.
